Despite Crop Insurance, Drought Still Stings Farmers

Corn plants dry in a drought-stricken farm field on July 17 near Fritchton, Ind. The corn and soybean belt in the middle of the nation is experiencing one of the worst droughts in more than five decades.

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Originally published on July 25, 2012 10:30 am

Stop by most any unirrigated farm across the lower Midwest and you'll see crops in distress. Midwestern corn and soybean farmers are taking a beating during the recent drought, but it's not likely to drive many out of business.

Most of those farmers carry terrific insurance, and the worse the drought becomes, the more individual farmers will be paid for their lost crops. The federal government picks up most of the cost of the crop insurance program, and this year that bill is going to be a whopper.

"The government has a program of crop insurance, revenue insurance, and it certainly is a lifesaver for years like this," Alderson says.

That's an attitude typical of most farmers affected by this drought, says Bruce Babcock, who specializes in agriculture economy at Iowa State University. They're not too worried because the great majority of them have crop insurance, he says. In the Corn Belt, upwards of 85 percent of farmers carry crop insurance, if you can call it that.

"It's not really insurance, because, as we know, when we buy insurance, we have to pay the full premium," Babcock says, "and that premium covers not only the losses, or the claims that are made, but also the administration and profit for the company."

When a farmer buys crop insurance, the government picks up most of the premium, and it also pays operating expenses for the companies. Those two subsidies cost close to $8 billion a year. But taxpayers also insure crop insurance companies against catastrophic loss.

So, as claims from this year's drought mount, the USDA will shoulder a larger and larger share of the payout. Babcock says it'll likely be taxpayers, not insurance companies, paying the bulk of this year's crop insurance claims, which could easily run more than $10 billion.

"The drought really shows how important the program is, and who's really funding it," Babcock says.

Payouts are going to be extra high because most Corn Belt farmers also carry coverage tied to the changing value of the crops they produce. The drought has cut projected supply and pushed prices way up.

The more bushels of corn that are lost, the more each one of those lost bushels tends to be worth for a farmer's insurance settlement, and the more taxpayers owe drought-stricken farmers.

"Crop farmers are going to be OK coming out of this drought," Babcock says. "Taxpayers are not going to be; they're going to be paying large losses."

Of course, taxpayers do expect to eat, even after an agricultural disaster, so, arguably, in that light, crop insurance makes sense, says Tom Zacharias, the president of National Crop Insurance Services.

"It's designed to help the consumer," Zacharias says, "so that we know that we have stable, secure food supply. [And] we want to keep farmers in business from year to year."

Zacharias says crop insurance is a pretty efficient way of doing it, because while farmers pay into the system year after year, they don't get any money out until something goes wrong. In normal years, crop insurance companies eat the losses, and he says those insurance companies are eager to please.

"These folks are 24/7," he says. "We have loss-adjuster staffs in the field as we speak."

So, disaster coverage payments typically arrive in time to cover getting the next crop in the ground and keeping the food system running. But, farmer Loren Alderson says, that's about as far as it goes.

"Technically, you don't lose money," Alderson says, "but if you're especially a younger farmer who's got land payments to make and machinery payments to make, they're not going to be able to make those costs with insurance."

While it will take months to figure the true costs of this rapidly intensifying drought, it is clear there is going to be plenty of pain to go around.

Midwestern corn and soybean farmers are taking a hit in the drought, but it is not likely to drive many of them out of business. Many of them carry insurance, and the worse the drought becomes, the more individual farmers will be paid for lost crops.

The federal government picks up most of the cost of the crop insurance program, and this year, the bill is going to be huge.

Frank Morris of member station KCUR in Kansas City has more.

FRANK MORRIS, BYLINE: Stop by most any un-irrigated farm across the lower Midwest, and you'll see crops in distress.

(SOUNDBITE OF TRUCK MOTOR)

MORRIS: Loren Alderson pulls his pick-up off the road and into a field of withered soybeans near Nickerson, Kansas.

LOREN ALDERSON: Two years ago, this would have been about three times this tall.

MORRIS: Wow.

ALDERSON: It's, to a large degree, already lost.

MORRIS: So this is mostly likely not a break-even proposition here in this field.

ALDERSON: It's probably not. However, the government has a program of crop insurance, revenue insurance, and it certainly is a lifesaver for years like this, especially for young people that...

BRUCE BABCOCK: I would say that farmer is typical of most farmers affected by this drought. They're not too worried, because by far, the great majority of them have crop insurance.

MORRIS: Bruce Babcock specializes in ag economy at Iowa State University. He says that in the Corn Belt, upwards of 85 percent of farmers carry crop insurance - if you can call it that.

BABCOCK: It's not really insurance, because as we know, when we buy insurance, we have to pay the full premium. And that premium covers not only the losses or the claims that are made, but also the administration and profit for the companies.

MORRIS: But when a farmer buys crop insurance, the government not only picks up most of the premium, it also pays operating expenses for the companies. Those two subsidies cost close to $8 billion a year. But there's more. Taxpayers also insure crop insurance companies against catastrophic loss.

So, as claims from this year's drought mount, the USDA will shoulder a larger and larger share of the payout. Babcock says it'll likely be taxpayers, not insurance companies paying the bulk of this year's crop insurance claims, which could easily run more than $10 billion.

BABCOCK: So, the drought really shows how important the program is and who's really funding it.

MORRIS: The payouts are going to be extra high, because most Corn Belt farmers also carry coverage tied to the changing value of the crops they produce. The drought has cut projected supply and pushed prices way up.

So the more bushels of corn are lost, the more each one of those lost bushels tend to be worth for the farmer's insurance settlement and the more tax payers owe drought-stricken farmers.

BABCOCK: Crop farmers are going to be OK coming out of this drought. Taxpayers are not going to be. They're going to be paying large losses.

MORRIS: Of course, taxpayers do expect to eat, even after an agricultural disaster. And Tom Zacharias, president of National Crop Insurance Services, says in that light...

TOM ZACHARIAS: Crop insurance makes sense. It's designed to benefit the consumer, so that we know that we have stable, secure food supply. We want to keep farmers in business from year to year.

MORRIS: Zacharias says crop insurance is a pretty efficient way of doing that, because while farmers pay into the system year after year, they don't get any money out until something goes wrong. In normal years, crop insurance companies cover the losses themselves, and he says those companies are eager to please.

ZACHARIAS: These folks are 24/7. We have loss adjuster staffs in the field as we speak.

MORRIS: Crop insurance payments typically arrive in time to cover getting the next crop in the ground and to keep the food system running. Farmers say it doesn't go much beyond that, though. Even crop insurance has a deductible, so farmers will lose income and may struggle to pay long-term expenses. So while it will take months to figure out the true cost of this rapidly intensifying drought, it's clear there's going to be plenty of financial pain to go around.